Dec. 4 (Bloomberg) -- Global oil majors from Exxon Mobil
Corp. to Chevron Corp. are about to get the clearest indication
yet of how far Mexican lawmakers will go to lure them into the
largest unexplored crude area after the Arctic Circle.

Senate committees will likely begin debating a bill to end
a seven-decade state oil monopoly tomorrow, said David Penchyna,
senator for the Institutional Revolutionary Party, or PRI. On
the agenda is a proposal by members of President Enrique Pena
Nieto’s PRI and the National Action Party, or PAN, to extend a
profit-sharing model unveiled in August by also allowing
production sharing or a license model used in Brazil, said two
people with knowledge of the talks.

The proposal seeks to offer companies more control over
riskier fields and attract enough investment to halt a decade-long output slump in Mexico’s $95 billion industry, the largest
crude supplier to the U.S. after Canada and Saudi Arabia.
Mexico’s estimated 13.9 billion barrels of reserves are the
biggest in Latin America after those of Venezuela and Brazil.

“If Mexico is going to spend political capital on a
constitutional amendment, they should try to get the most bang
for their buck,” Jeremy Martin, an oil specialist at the
Institute of the Americas in La Jolla, California, said in a
telephone interview. Granting concessions or licenses “gives
stronger support to the end goal.”

Economic Growth

Pena Nieto’s government says approval of an energy overhaul
would lift economic growth 1 percentage point by 2018 and
reverse oil production losses. A more “market-friendly” reform
could increase foreign investment by as much as $15 billion
annually and boost potential economic growth by half a
percentage point, according to a Nov. 28 report from JPMorgan
Chase & Co.

Mexico’s Senate may pass the energy bill by Sunday and are
working to approve the overhaul by the end of ordinary
legislative sessions on Dec. 15, Penchyna told reporters today.

Petroleos Mexicanos, the state-owned producer known as
Pemex, is headed for a ninth straight year of output declines
after production at Cantarell, the world’s third-largest deposit
when discovered in 1976, slumped more than 80 percent in the
past decade. Crude production at Pemex has fallen to about 2.5
million barrels a day this year from 3.3 million in 2004. The
country now imports 34 percent of its oil, according to Chief
Executive Officer Emilio Lozoya.

Falling Production

“Investment in exploration has multiplied dramatically,
though production has fallen,” Lozoya told Congress on Nov. 20.
“To increase production in Mexico, more investment is required.
One way to do this is to share the investment between other
companies and Pemex.”

The peso strengthened 0.5 percent to 13.0364 per dollar at
3:35 p.m. in Mexico City.

There is a greater chance the senate will draft a proposal
that’s more appealing to investors after the Democratic
Revolution Party, or PRD, exited a political alliance that was
being used to negotiate the reform, said Gabriel Lozano, chief
Mexico economist at JPMorgan. The PRD, which opposes some of the
proposed legislation, pulled out of the group known as the Pact
for Mexico on Nov. 28.

Without the PRD, “there is room for discussing and
submitting a more investor-friendly proposal, something that is
more similar to a license type of agreement,” Lozano said in a
telephone interview on Dec. 2.

Seized Assets

Pemex was created in 1938 by President Lazaro Cardenas
after he seized assets from companies that later became part of
Exxon, the world’s largest oil company, and Royal Dutch Shell
Plc, Europe’s largest. More than seven decades later, both
companies have expressed interest in investing in Mexico as
rules change.

Private and foreign companies were prohibited from
exploring or producing oil until October 2008, when the law was
revised to allow incentive-based, fixed-fee contracts for some
crude production. Pemex is also the only domestic refiner of
crude.

PRI and PAN lawmakers reached a preliminary accord in
October that would allow Mexico to offer companies service
contracts and profit and production sharing and licenses. The
agreement remains in place, the two people with knowledge of the
discussions said yesterday, asking not to be named as the plan
hasn’t been made public.

Shale Deposits

Mexico’s failure to boost output contrasts with a
production boom in the U.S., where companies such as Chevron are
tapping reserves trapped in shale rock deposits with technology
such as hydraulic fracturing, or fracking.

While Pemex produces 19 barrels of oil a day for every
employee, Exxon produces 29 barrels. Third-quarter sales at
Exxon were triple those of Pemex even though the U.S. producer’s
daily output of oil liquids is about 20 percent less.

Given increased oil prices and diminished production,
Mexico is on track to become a net importer of energy, Pemex’s
Lozoya said. Without a reform, Pemex would need an estimated $1
trillion of investment to extract prospective reserves in the
next 50 years, he said. To do so, annual investments would have
to be increased to $62 billion from $25 billion.

The PRI and the PAN also want to revamp Pemex’s corporate
structure to give the company more autonomy to make its own
strategy and budget decisions.

“Pemex is a very troubled, poorly run company that has to
hand off almost all of its revenue to the government and has
declining oil production,” said Pavel Molchanov, an analyst
with Raymond James Financial Inc., in a phone interview. “Any
changes made to company structure in a reform would be a major
improvement.”

Constitutional Change

Allowing other companies to explore and drill for gas and
oil in Mexico requires a constitutional amendment that could
only pass with a two-thirds majority in both the lower house and
senate. The PAN, PRI and Green Party have enough votes to
approve a charter change.

The PAN has said congress must first approve an overhaul of
the electoral system before it would consider backing an energy
bill. That electoral reform passed the senate early this
morning. PRI senate leader Emilio Gamboa said yesterday that
once the upper house voted in favor of electoral changes it
could begin debating the oil bill.

Production Sharing

Pena Nieto’s energy overhaul proposal presented on Aug. 12
limited contracts to risk-sharing accords with cash payments.
The PAN presented its own initiative in July that seeks
concession contracts and allowing companies to book reserves
directly to their balance sheets. The preliminary agreement
between the PRI and PAN will seek to have as many contract
options as possible, including those where producers are paid
with oil.

“The most likely scenario for the energy reform is that it
includes concessions and production-sharing agreements because
the PAN will only approve a truly pro-market bill,” Benito
Berber, a strategist at Nomura Holdings Inc. in New York, said
in an e-mailed research note on Dec. 2.